Education Loan Moratorium Explained: Why the EMI Starts at ₹0 and What It Costs

Education Loan Moratorium Explained: Why the EMI Starts at ₹0 and What It Costs

Many students hear that their education loan instalment will be ₹0 for years and take it as good news. It is good news for cash flow, because the equated monthly instalment (EMI) really does not start while the student is studying. It is not a free ride, because interest keeps running in the background. The education loan moratorium is the period that creates this gap, and understanding how long it lasts, how interest behaves during it and what it costs in rupees helps a family avoid a surprise when the first EMI finally arrives.

What is an education loan moratorium?

A moratorium is a repayment holiday. In an education loan moratorium, the holiday covers the course and a further period after it, so that a graduate has time to find work before instalments begin. During this stretch the money is often released to the college in parts, and the borrower pays little or nothing each month.

The education loan moratorium is not interest-free in most schemes. It means only that the EMI has not started. The lender keeps charging interest on the amount disbursed, and what happens to that interest depends on the scheme.

The Indian Banks' Association (IBA), the industry body for banks, drew up a model scheme that most public sector banks follow. The version published on Canara Bank's site describes a moratorium of the course period plus one year, and repayment in monthly instalments over a maximum of 15 years, excluding the moratorium.

How long is the education loan moratorium?

It differs by lender and scheme, so the same phrase can mean different periods. Here is how a few of them describe it:

Always ask how the lender defines the end of the course. A delay in results or a break in studies can shift the date on which the first EMI falls due, and the lender's rules on this are in the sanction letter.

SBI's Student Loan page describes a repayment holiday of the course period plus 12 months, with repayment starting one year after the course and running for up to 15 years. Under its Student Loan scheme the accrued interest during the course and the moratorium is added to the principal, and the EMI is fixed on that total.

The page adds a useful option: if the full interest is paid before repayment begins, the EMI is fixed on the original principal alone. That single line explains most of the money-saving advice on the education loan moratorium. The rest of the advice is about timing: how early you start paying, and how much.

A holiday that ends one year after the course means the first EMI falls due about a year after graduation. Plan for that date from the first year of the course, not the last month.

For overseas study, SBI's Global Ed-Vantage page says simple interest is charged during the course period and the moratorium, and the accrued interest is added to the principal before the EMI is fixed. It also says repayment begins six months after the course ends, which is shorter than the one-year holiday in the domestic scheme.

A shorter gap means less interest added to the balance, but also less time to find a job abroad or at home before the first EMI. Students going overseas should check whether work permissions after the course give them enough runway.

Whichever scheme applies, find out whether the clock starts from the last exam, the results or the date of the degree. The sanction letter should name it.

HDFC Bank defines the term on its education loan page as the course period plus one year, or six months after getting a job, whichever is earlier. It separates a principal moratorium, where only the repayment of principal is paused, from an interest moratorium, where interest is paused too. A shorter education loan moratorium can mean the EMI starts earlier than a family expects, so check which rule applies.

How does interest work during the moratorium?

There are two common patterns in an education loan moratorium. In the first, interest builds up and is added to the loan when the holiday ends, so the EMI is calculated on a bigger amount. In the second, the borrower pays the interest each month, so the loan stays at the amount actually disbursed.

Banks describe the first as simple interest during the course and the holiday, with the total then added to the principal. Simple interest means interest is charged on the amount disbursed and not on earlier interest. After it is added, however, the new total earns interest in the EMI phase. That is where the extra cost comes from.

Ask whether the education loan moratorium charges simple interest, whether it is collected monthly or added at the end, and what happens to the EMI if you pay part of it. These details matter more than the headline rate.

What does the education loan moratorium cost in rupees?

An illustration makes this concrete. Assume a ₹20 lakh loan at 9.65%, the rate SBI lists with collateral on its rate card effective 15 October 2026. The money is drawn in four equal parts of ₹5 lakh at the start of each semester of a two-year course, followed by a 12 month holiday.

If the borrower pays nothing, about ₹4.34 lakh of simple interest builds up by the end of the holiday, and the balance at the start of repayment is about ₹24.34 lakh. If the borrower pays the interest each month instead, the payments rise as each part is disbursed: about ₹4,000 a month after the first part, ₹8,000 after the second, ₹12,100 after the third and ₹16,100 once the full amount is out. The loan then stays at ₹20 lakh.

The totals include the ₹4.34 lakh paid during the holiday in the second column. Paying the interest early saves about ₹2.4 lakh over 10 years and about ₹3.9 lakh over 15 years, and it lowers the EMI by roughly ₹4,500 to ₹5,700 a month. These are illustrative figures at a fixed rate, not a bank quote, and a floating rate would change them.

A student who cannot pay all of the interest can still pay part. Every rupee paid during the education loan moratorium is a rupee that stops earning interest later.

Can the government pay the interest during the moratorium?

For some students, yes. A government explainer on the PM-Vidyalaxmi scheme describes two forms of help. Under the Central Sector Interest Subsidy scheme, students from families with annual income up to ₹4.5 lakh, studying technical or professional courses at approved institutions, get full interest subvention during the moratorium on loans up to ₹10 lakh.

Under PM-Vidyalaxmi, students from families with income up to ₹8 lakh get a 3% interest subvention on loans up to ₹10 lakh during the education loan moratorium, which is the course period plus one year. The 3% benefit is limited to one lakh fresh students a year, and a student who already gets another government scholarship, interest subvention or fee reimbursement is not eligible.

In the earlier illustration, if ₹10 lakh of the loan were drawn in two parts, full subvention would cover about ₹2.65 lakh of interest, and the 3% scheme about ₹82,500. These are upper-end estimates for that drawdown, and the actual benefit depends on eligibility and the bank's records. Interest subvention simply means the government pays that part of the interest for you.

Does the moratorium affect tax?

The interest deduction once called Section 80E is now Section 129 of the Income-tax Act, 2025. According to Credila's explainer, the deduction can be claimed from the year you start repaying and for up to eight consecutive years, and only the interest part counts. So interest paid during the moratorium may not count toward that window, and whether it does depends on how the lender books it and on your tax regime. Ask a tax adviser before planning around it.

How should a family plan for the end of the education loan moratorium?

Work backwards from the date the first EMI falls due. Twelve months before it, ask the lender for a statement showing the balance, the interest that has built up and the EMI that will result. Six months before, compare that EMI with the income the graduate expects, and decide whether to pay a lump sum, shorten the term or ask for a longer one.

A lender may agree to adjust the schedule if a job is delayed, but it does not have to, and unpaid instalments cost late charges and harm the credit record. The safest approach is to treat the end of the education loan moratorium as a deadline and to build a small reserve while it lasts.

What mistakes should families avoid?

• Reading "EMI ₹0" as "no cost" and ignoring the interest that builds up.
• Not asking which interest method the education loan moratorium uses.
• Missing the date on which the moratorium ends, especially when it is linked to a job.
• Assuming a longer education loan moratorium is always better, when it adds to the balance.
• Overlooking government subvention schemes that could reduce the interest.

A simple habit helps: ask the lender for a statement at the end of each year showing how much interest has built up. Treat the education loan moratorium as a planning tool, not a gift, and decide in advance whether to pay interest during it.

What should you ask your lender?

Ask how long the education loan moratorium runs and what ends it, how interest is charged during it, whether you may pay interest monthly, and how the EMI is recalculated if you pay part of the balance early. Get the answers in the sanction letter, since policies change.

FundMyCampus is an education loan advisory platform founded by an alumnus of the Indian Institute of Management Bangalore. It is not a bank, its website says it does not charge students any fee, and it works with more than 12 banking partners. It offers free tools, including an EMI calculator, an eligibility checker and a loan comparison tool.

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